At the end of 2023, the capital markets industry continues on a significant transformation journey that is expected to reshape and redefine the landscape over the next 12 months.
There is increasing pressure on traditional business models, fierce competition from new disruptive players, technological advancement aimed at increasing efficiency, and shifting priorities of both investors and investees when it comes to risk management and maximising returns.
As we enter 2024, the industry outlook across the various capital markets sub-sectors – investment banking, wealth management, securities services and market infrastructure – indicates that the evolution will continue. Players must continue to, and increase their ability to be agile, and innovative to stay relevant and competitive.
Global uncertainties combined with digital disruption create an imperative for players to reshape their business models. Cost pressures and declining margins in investment banking come alongside demographic shifts driving growth in wealth management. Meanwhile, infrastructure players leverage technology to find new revenue streams, and outsourcing specialists carve up the value chain.
Cognizant’s 2024 capital markets outlook considers the four sub-sectors mentioned above.
Refocusing the core
Investment banks – one of the key the engines of global capital markets – face continued challenges going into 2024. After a decade of low interest rates and high inflation putting pressure on performance investment banks must continue to fund expansive operations.
After a disappointing 2023 performance, with declining deal volumes and fee income across debt and equity capital markets, the focus in the coming year will be on reducing costs and rightsizing operations.
Investment banks will aim to improve cost-to-income ratios by delivering more profitable deals and finding ways to drive greater efficiency through front-to-back digitisation.
However, questions loom in the background on whether this is part of a cyclical downturn or indicative of more profound structural shifts in the industry.
The current downturn comes after years of mixed performance driven by quantitative easing and excess liquidity, fuelling deals and trading activity. With liquidity tightening and recessionary pressures, 2024 likely is the bottoming out rather than the start of a structural decline. Investment banks will refocus on core strengths and double down on their competitive advantages.
However, this will also force the rightsizing of operations and potential exit from some business lines altogether. Cost pressures and digital disruption from fintech challengers will drive this redefinition of operating models. There may also be opportunities to offload value chain components to specialised players who can do it more efficiently – for example, post-trade processing.
2024 is when we can expect moves to resize and remodel investment banking franchises to be prepared for the next upward cycle.
Advisors for the digital era
Wealth management has been a steady growth story in recent years, and this trajectory is expected to continue, driven by consistent tailwinds. Economic expansion and growing prosperity, especially in emerging markets like China, India, and Southeast Asia, lead to larger high-net-worth and ultra-high-net-worth populations. Intergenerational transfer of wealth will further feed into this demographic trend of more people with more investable income and assets.
While digital channels will continue to play an important role, competitive differentiation for wealth managers will come from the personalisation of offerings. The human touch remains highly valued by wealthy clients alongside just portfolio performance – and this is arguably more important in an increasingly digital world.
Progressive wealth managers will provide hybrid human-digital capabilities to stand apart. We will see a rise in advisors digitising portfolio management and reporting to enable hyper-customised offerings. Behind the scenes, AI analytics help advisors identify new opportunities aligned with client interests across portfolios spanning generations. But wealth managers will also maintain high-touch services, becoming trusted advisors instead of just investment resources.
Incumbents like the large banks have an edge here with established reputations and client trust. They can leverage this by augmenting relationship-manager capabilities using integrated data across banking, wealth and asset management franchises. This allows hyper-personalisation of services ranging from legacy and succession planning to philanthropy, tax optimisation and so on based on a holistic view of client needs and behaviours.
Expect this trend to develop into a private bank atmosphere – the kind of luxury experience reserved for elite clients. In 2024, wealth management will merge with private banking in offerings like:
- Concierge services, handling everything from travel to real estate
- Proprietary research providing privileged insight and access
- Lavish physical offices and events beyond typical bank branches
Notably, the ESG agenda may temporarily take a backseat amid recessionary pressures and wealth preservation becoming paramount. Values-based investing will remain an underlying expectation as intergenerational wealth transfer leads to demand from Millennial and Generation Z investors.
Overall, the wealth management industry outlook remains positive for 2024, with incumbents able to fend off competition from digital disruptors by getting the mix of high-touch relationship management and digital personalisation right.
The securities services sector has seen shifts in the competitive landscape driven by traditional players repositioning themselves and new entrants looking to cannibalise parts of the value chain. This dynamic change will continue at pace through 2024.
Large asset-servicing firms have bolstered capabilities to service both buy-side and sell-side clients. Custodians have made a concerted push upstream to capture more revenue share beyond their core custody and fund administration offerings. Market data provision, trade execution, collateral management, and middle office services are all areas targeted to drive higher fee income. The end game is to become a one-stop-shop able to meet a wide spectrum of client needs competitively.
At the same time, leveraging scale and digital prowess platforms with integrated front-to-back solutions will have a competitive advantage. Having set a gold standard in buy-side services the focus is now on attracting sell-side clients with configurable offerings covering areas like risk analytics, portfolio management, trading management, operations, and accounting. The competition with traditional providers is intensifying as a result.
Other asset managers have also bulked up their securities services units to capture market share. The prize on offer is the large volumes of assets under management and capital-markets activity that translates into steady, recurring revenue streams from core processing functions. This area is seen as a stable source of income to balance out the volatility of other markets facing businesses.
Evolving into knowledge markets
Market infrastructure underpins modern finance, from public exchanges to clearing houses and repositories.
Exchanges have faced an increasingly competitive and challenging environment over the last few years driven by new entrants, new investor demands and margin pressures. In 2024, the imperative will be to leverage technology to defend and grow market share while finding creative ways to diversify revenue streams beyond traditional sources.
Diversifying revenue streams also requires exploring adjacency opportunities in areas like providing post-trade infrastructure solutions, offering collateral management and securities lending services, and getting into the digital asset space. Market infrastructure players must spread their wings to enter new, high-growth opportunities while ensuring their core exchange business remains solid and efficient.
Market infrastructure is becoming a knowledge market. Going into 2024, providers will leverage their digital transformation and combine it with a more innovative and entrepreneurial approach to business expansion and access to the data and capabilities afforded by hyper-scalers.
Look for exchanges to partner with technology firms in creating next-generation offerings. As the prime example, London Stock Exchange and Microsoft jointly produce an AI-analytics platform merging news sentiment and technical indicators for signal creation across multiple asset classes.
Wielding AI and cloud architectures, exchanges transform internally to keep pace with ever-evolving global markets externally.